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What’s New in Controlling Health Insurance Costs? Reference Based Pricing. (Part 1 of 2)

| June 12, 2018
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As the insurance market continues to evolve and employers continue to seek ways to control medical insurance costs, the concept of referenced based pricing (RBP) is a newer technique being explored.  For consultants working with employers, RBP is showing up in PowerPoint presentations and CE credit courses with regularity.  There is a lot of discussion about the pros and cons of this cost control strategy. 

Let’s talk about referenced base pricing as it relates to group health benefit plans.  RBP is set up by employers who are self-insured (whereby an employer provides health benefits to employees with its own funds), they set a pricing cap on the maximum amount that they will cover for certain medical services, a class of services or potentially all out of network procedures.  Usually high cost, low frequency procedures that can have wide retail pricing variations, such as knee or hip replacements.  This does not mean that lower cost, higher frequency procedures can’t be targeted but RBP is about reducing overall costs and the “law of large numbers” comes in to play when trying to achieve that goal.

In any RBP model there must be a substantial reference (pricing) model available, (Medicare, fairhealth.org, etc.) some tangible “reference” that the company will use when setting the target reimbursement for procedures, ostensibly below the retail rate.  The procedure targets are typically, by their nature, performed in an institutional setting (hospitals, surgery centers).  Pharmacy costs are also potential large costs targets for an RBP model.

Sounds simple right?  Who is most likely to consider a RBP model?   I present to you the 3 S’s, they are: Size, Self-Insured and Staffed.

If you do not have more than 100 employees (Size), are not currently self, (or at least partial or level funded) insured and if you do not have (or willing to invest in) some staff and/or infrastructure to set up and monitor, it may not be right you.  Since there is no contract between the medical institutions/providers and the companies utilizing an RBP, the ultimate hazard is said institution not accepting the RBP reimbursement as payment in full and producing a significant “balance bill” for one of these large cost services.  A balance bill simply defined as the difference between the procedure retail cost and the reimbursement from an insurer.  In the RBP case, that balance bill ultimately is the financial responsibility of the patient.  A $190,000 knee surgery with an RBP of $100,000 leaves a $90,000 balance bill.  The implications here are not just for the person’s financial standing, but to credit ratings and even their work performance and mental health are real.

Okay, take a breath… the worst case scenario is over.  In reality, medical institutions, especially hospitals, have poor collection records.  They know this; it’s no secret.  Hospitals (and I stress most, at present) are willing to accept payment for less than their retail rate in exchange for guaranteeing collections.  There are some regulatory safe guards, at least in the short term that can protect a balance billed patient from adverse collections and credit ratings.  For example in my state, the Commonwealth of Pennsylvania, medical bills you incur aren't secured by your property and thus your creditors cannot seize your car, home or other assets should you fail to pay what you owe. They can, however, send you to collections. Debt collectors must adhere to the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Extension Uniformity Act (FCEUA).  Both providing some relief while/if negotiations are necessary.

The upside in our scenario is that the hospital accepts the $100K as payment for the procedure and the bill to the self-funded health plan is reduced. It is a risk and this is the reason for the third S in my applicability test above.  Are you staffed or better yet do you have a corporate culture that is willing to monitor these types of procedures and help navigate through them?  A good RBP administrator will have resources and they will help you but in the end you have to inform and train your employees on the benefits of going the RBP route.  You have to face them if a balance bill occurs, after all you are the one who sees them every day.  

If you meet the three “S’s” and want to learn more, I will have a follow-up blog to share more.  Give Tycor a call if you would like to discuss your business’s situation in greater detail or have an experience to share about working with reference based pricing.

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